06ASTANA824, KAZAKHSTAN: PREPARING FOR FUTURE ROUND OF OFFSHORE

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C O N F I D E N T I A L SECTION 01 OF 03 ASTANA 000824
SIPDIS
NOFORN
SIPDIS
DEPT FOR EB/ESC; SCA/CEN (O'MARA)
E.O. 12958: DECL: 12/11/2016
TAGS: ENRGEPETKZ
SUBJECT: KAZAKHSTAN: PREPARING FOR FUTURE ROUND OF OFFSHORE
OIL TENDERS?
REF: ASTANA 738
Classified By: Pol-Econ Chief Deborah Mennuti; reasons
1.4 (b) and (d).
¶1. (C) Summary: In early 2006, the Government of Kazakhstan
granted a small geophysical company, Caspian Veritas LLP,
exclusive rights to acquire seismic data over the entire
"open" (unassigned) acreage of the Kazakhstani sector of the
Caspian Sea. The company -- and at least one major
prospective client -- believe this data will be used to
launch Kazakhstan's first-ever round of "open" tenders for
offshore fields, perhaps as early as late 2007. Moving to an
open tender system would be consistent with the 2005
Production Sharing Agreement Law, which grants priority to an
open tender system. In the current system, individual
companies are invited to negotiate their participation in a
project with KazMunaiGaz (KMG), the national oil and gas
company. Energy Minister Izmukhambetov, however, has spoken
publicly of delaying new tenders indefinitely, focusing the
GOK's resources instead on developing existing fields and
finalizing contracts already under negotiation. A Shell
executive, experienced in competing -- and winning -- in the
current system, believes the "direct negotiation" approach is
well-suited to Kazakhstan and unlikely to change in the near
future. End summary.
Kazakhstani Law -- and Current Practice
---------------------------------------
¶2. (C) Kazakhstan's July 2005 Production Sharing Agreement
(PSA) Law was the first legislation to systematically outline
a process for assigning offshore rights. (Of course, PSAs
had been signed prior to passage of the law, at Kashagan,
Karachaganak, Tyub-Karagan, and Kurmangazy.) The law
specifies three ways in which offshore blocks can be
assigned. The "primary" method is by open or closed tender
-- though, to date, none have been held. The PSA Law also
grants the GOK the right to assign blocks, without tender, if
provided for by treaty or to "fulfill other obligations" of
the State. (This process was used in creating the Kurmangazy
PSA. Kurmangazy straddles the Kazakhstani/Russian Caspian
boundary line, and thus presented treaty implications.)
Finally, the PSA Law allows the "national company"
(KazMunaiGaz) to obtain fields by "direct negotiations" with
MEMR, and then subsequently to seek a "strategic partner"
(without tender) to participate in field development. This
process, in fact, has been pursued in all of the offshore
projects currently being negotiated with foreign oil
companies.
¶3. (C) The passage of the PSA Law spurred much speculation
that, with the fundamental tender rules outlined and
codified, the GOK would soon prepare an open tender for an
offshore field. On several occasions since the passage of the
law, however, Energy Minister Izmukhambetov has announced the
GOK's intent to indefinitely postpone the tender process, in
favor of concentrating on concluding ongoing negotiations and
developing existing projects -- notably, Kashagan -- in which
KMG is already a partner. Many oil executives here subscribe
to the theory, implicit in Izmukhambetov's statements, that
KMG lacks the institutional capacity to manage more offshore
projects, and/or the finances to uphold its share of further
offshore projects.
Shell Articulates Advantages of Direct Negotiations
--------------------------------------------- ------
¶4. (C) With a share in Kashagan and offshore Zhemchuzhnaya,
and an apparent lock on participation in the "N Block"
project (reftel), Shell has arguably had more recent success
in securing offshore Kazakhstani prospects than any other
company. On December 8, Martin Ferstl, Shell's Country
Chairman, shared his impressions of the process with Econoff.
Ferstl suggested that the GOK preferred having companies
negotiate directly with KMG, rather than conducting open
tenders, because the former process allowed KMG to negotiate
with several companies at once. This benefited KMG early in
the process, he said, because it allowed KMG to see each
company's seismic data set -- and thus compensate for the
fact that the GOK often did not have independent access to
the best data in existence. After seeing each company's data
set, Ferstl continued, KMG would acquire the technical
knowledge of the block in question well enough to conduct
intelligent negotiations over the financial terms for access
to the process. Finally, he said, KMG benefited from having
ASTANA 00000824 002 OF 003
two or more project finalists bid against one another,
because KMG was more likely to receive a fair bid that way
than if it had to evaluate a series of tender bids against
the technical baseline of a project that it did not
understand very well.
¶5. (C) To succeed in the current system, Ferstl continued, a
company had to establish good personal relationships with
Kazakhstani energy insiders. Over time, he explained, the
Kazakhstani offshore had come to be divided into separate
"fiefdoms" associated informall
y with the one (or more)
companies which had demonstrated persistent interest. These
companies tended to be the ones invited into negotiations
with KMG. This relationship-oriented process, Ferstl argued,
fit Kazakhstan's culture better than the "objective,"
bureaucratic approach of a formal tender -- one reason, he
said, why the GOK was unlikely to adopt the open tender
process in the near future.
¶6. (C) At the same time, Ferstl described the Kazakhstani
system of direct negotiation with KMG as "immensely
frustrating." Shell had spent four-and-a-half years
negotiating access to the "N Block," he cited by way of
example, while in most countries "a tender process would be
concluded in six months." Part of the reason for the long
process, he said, was that the GOK was in no hurry to develop
the offshore Caspian. Ferstl cited the shortage of
institutional resources (para. 3) as one example, along with
the idea that the GOK's cash flow from current projects meets
the GOK's development goals.
Seismic Data Acquisition Project
--------------------------------
¶7. (C) Despite the GOK's established preference to assign
blocks via direct negotiation, there are those who believe an
open tender process is on the horizon. In early 2006 the
Ministry of Energy and Mineral Resources (MEMR) concluded an
agreement with Veritas Caspian LLP (a 50/50 joint venture
between Salt Lake City-based Caspian Services, Inc., and
Veritas DCG of Houston) giving Veritas Caspian an exclusive
right to obtain seismic data over the entire open
(unassigned) acreage of the Kazakhstani sector of the
Caspian. Veritas Caspian also secured the right to market
the data for ten years on behalf of the GOK, which it will do
by creating a seismic data database available for purchase by
interested oil companies. Veritas Caspian recently completed
its first season of work, shooting approximately 660
kilometers of 2D seismic data in the "Chagala" area of the
Caspian -- just South of the super-giant Kashagan field.
Veritas Caspian has largely funded its seismic acquisition
project by offering "subscriptions" to oil companies. In
return for an upfront, one-time payment, subscribers are
allowed input into which sectors of the sea Veritas Caspian
will shoot first and most comprehensively, along with
preferential access to the finished data, which will
eventually be distributed to any interested buyer.
¶8. (C/NF) Terrance Powell, Caspian Services' Vice President
for Investor Relations, told Econoff that oil companies had
eagerly paid to become "subscribers" to the service, and at
least one oil major had "screamed bloody murder" after being
told they had missed the deadline to participate. Peter
Claypoole, ExxonMobil's Manager for New Business Development,
told Econoff that his company was an eager "subscriber" to
the process, and expected that the seismic data would be used
to launch future rounds of open tenders for offshore blocks.
ExxonMobil, he added, was extremely interested in the
"Primorsk" block (estimated 2 billion barrels) of the Chagala
area, and was eagerly awaiting the completed data package and
an anticipated tender. Powell told Econoff that his company
had been told that the seismic data would be used as the
basis for an "open tender" round, perhaps as early as
year-end 2007, but acknowledged that MEMR had sent
conflicting signals about its intent.
¶9. (C) Comment: While the seismic data database being built
could, presumably, give KMG the technical expertise it
currently lacks to conduct an open tender, it would not
appear to necessitate a change in the current process for
assigning offshore blocks. If, as Ferstl indicated, the GOK
is comfortable linking the assignments process to various
"soft" considerations, including interpersonal relationships
and, presumably, Kazakhstan's broader geopolitical concerns,
then a continuation of the status quo might be the most
likely outcome. End comment.
ASTANA 00000824 003 OF 003
MILAS

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